Mr Speaker, it was less than three years ago that the world was witnessing an unprecedented meltdown in the global financial system. Not long after, the global economy plunged into the depths of recession - the worst the world had endured in 75 years. Throughout this period, I have from time to time provided an update on events to the Parliament.
In light of events in Europe in the past week and broader challenges facing parts of the global economy, it is appropriate that I do this again before Members rise for the winter break.
Mr Speaker, recovering from such a widespread and severe financial crisis was always going to be hard. It was never going to be speedy; it was never going to be seamless. The IMF made this very point back in April 2009, in its World Economic Outlook, when it said:
“Recessions associated with financial crises have been more severe and longer lasting than recessions associated with other shocks. Recoveries from such recessions have been typically slower, associated with weak domestic demand and tight credit conditions.”
So it should come as no surprise that many economies are still coming to terms with the considerable legacies of the crisis.
But it's important to remember that Australia is in a far stronger position than most advanced economies. This is because we heeded these very warnings from the IMF and the broader international community that it would be harder for economies to recover from a recession that was induced by a financial crisis. It is exactly why we acted to avert a recession at home.
It is because of the action that we took at the heart of GFC, and the hard work of the Australian people, that we now have a strong outlook, strong job creation and a strong fiscal position. And despite the fact that we've been hit hard by natural disasters, we continue to have one of the most enviable economic scorecards of the developed world.
Of course, we are not immune from global uncertainty - and this is clearly reflected in some of the patchy economic conditions we are experiencing at home. But it doesn't change the fact that we face a dramatically different set of challenges to many of our peers.
And as I have said before, our challenges are far better challenges to have.
International uncertainty
For some time now, I have characterised the global recovery as uneven and subject to risk. In recent weeks these risks have become more pronounced and the global recovery has weakened.
We have seen a hit to the Japanese economy from the earthquake, tsunami and nuclear disaster as well as disruption to international supply chains. In the US, a depressed labour market, unprecedented weakness in the housing market and high oil prices are all holding back recovery.
Most significantly, we have seen debt problems confronting a number of European economies - especially Greece. The uncertainty surrounding the situation in Europe has weighed on markets and generated significant volatility these past few weeks. The Greek Parliament approved last week a further package of austerity measures which will allow for the provision of the next tranche of its existing EU and IMF assistance package.
Of course, I welcome Greek and European efforts to avert what would have been an immediate default. But we should not underestimate the challenges ahead for Greece and Europe more generally.
It must deal with a huge debt overhang, and a projected fiscal consolidation of around 12 per cent of GDP over the next five years. This comes on top of the unprecedented consolidation already implemented, worth 8 per cent of GDP.
Greece, Portugal and Ireland are by themselves relatively small parts of the global economy, so the direct impact of their issues is limited. However, given their status as euro area members, the potential for contagion is significant, particularly in the event of a disorderly default or an unravelling of assistance. With banks in Europe and the US holding significant amounts of European government debt, such contagion could generate renewed financial market turmoil globally.
These challenges were underlined just last night when Moody's cut Portugal's credit rating by four notches to below investment grade. Moody's pointed to a growing risk that Portugal would also need further financial support and that it may be unable to meet its deficit reduction targets.
The role of European authorities and EU member states in confronting the challenges facing Greece, Portugal and Ireland is crucial, and it is essential that they take decisive action. These issues also go to the heart of the work I am doing with my G20 colleagues to bring about strong, sustainable and balanced global growth.
Even beyond these immediate challenges, Europe's high government debt, persistently high unemployment and structural rigidities, suggest it is unlikely to contribute substantially to global growth for some considerable time.
Mr Speaker, it is not just Europe that faces continued sluggish growth and challenges in addressing fiscal sustainability. The United States and Japan are faced with balancing the need to avoid undermining their economic recoveries in the short term, while setting in place credible medium-term plans to address high and rising public debt. As the IMF warned last week, the failure by the US to move quickly to increase its borrowing authority could result in a severe shock to global financial markets.
Asian Century
Mr Speaker, despite the fragile global outlook, we can take confidence in the fact that the outlook for our own region remains bright.
Of course, if the events in Europe did trigger a more serious disruption in global financial markets, or significantly stalled the global recovery, then this would have implications for us and our neighbours. But from where we sit now, we are well placed to benefit from strong conditions on our doorstep, which are expected to continue for some time.
Unlike many advanced economies in the West, emerging Asia recovered relatively quickly from the GFC, and is now growing strongly. This strong growth in Asia is helping to accelerate the transformation that was already underway in the global economy before the crisis hit.
Twenty years ago China and India together accounted for less than one-tenth of world production. Today that share has doubled, and by the end of this decade it is expected to be over a quarter of world production.
We can see the first manifestation of the Asian Century on Australia in the mining boom. But there will be just as pronounced an impact on the rest of our economy in future as the growth in Asia's middle-class drives demand for the rest of our goods and services.
This means that enormous opportunities are unfolding on our doorstep. It also means that we need to ensure the Australian economy has the productive capacity and the right long-term settings in place to allow us to grab this opportunity and not let go.
Domestic strength
Mr Speaker, the opportunities of the Asian Century are not just on offer to us because of our positioning in the global economy. The fact is, we are only in a position to capitalise on these opportunities because of our strong economic foundations.
If we hadn't weathered the GFC like we did, if we had instead followed the rest of the world into recession, then we'd be in a very different position today. While many of our peers are still struggling to make up for lost ground, Australia's GDP is now significantly ahead of what it was at the start of the crisis.
This has meant we have avoided the stubbornly high rates of unemployment that now plague many advanced economies. While our unemployment rate stands at just 4.9 per cent, economies like the US and euro area are grappling with unemployment rates in excess of 9 per cent.
We have also emerged from the global recession with lower government debt and lower deficits than any of the major advanced economies. Net government debt is expected to peak at 7.2 per cent of GDP in 2011-12 and decline thereafter. Even at its peak, Australia's net debt will be less than one-tenth of the average of the major advanced economies.
But despite our impressive scorecard, we know that the GFC is still having a lingering impact on some parts of the economy, as is the continued uncertainty in the global economy. Consumers are still more cautious than they have been in the period before the crisis - spending less and saving a bit more. This isn't surprising given the subdued recovery in household wealth since the GFC, and the uncertainty surrounding the global outlook. Credit conditions also remain tight.
On top of this, we've taken a huge hit from last summer's natural disasters, and although we've made significant progress in recovery, there's still a long way to go.
The higher dollar - a sign of our relative economic strength - is also a burden for many of our industries, such as manufacturing and tourism.
But despite these soft spots, we need to remember that our fundamentals are strong, and we are well positioned to benefit from robust growth in the most dynamic corner of the global economy. And the historic shift in the global gravity from East to West is taking our terms of trade to record heights, and is driving an unprecedented pipeline of business investment - with ABARES estimating a pipeline of $430 billion in resources alone.
So Australia is located in the right part of the world at the right time - the prospects for our region remain much stronger as the weight of global activity continues to shift in our favour.
Australian banks have also strengthened their regulatory capital and maintained sound provisioning levels. Local banks now depend less on wholesale funding from abroad than during the global financial crisis because they are attracting more local deposits. Their foreign currency denominated funding remains fully hedged into Australian dollars.
All of these factors mean that Australian banks are in a good position to meet future challenges. But it is important that we build on our existing regulatory framework to ensure that we maintain a world-class, efficient and safe financial sector.
The Government is committed to implementing the Basel III reforms to ensure banks have sufficient liquidity to withstand stress in global funding markets and appropriate capital levels as a buffer against unexpected losses. The Government is also taking action through its Competitive and Sustainable Banking System reforms to help consumers get a better deal, while also securing the long-term safety and sustainability of our financial system.
Mr Speaker, this Government is clearly focussed on the challenges facing the global economy and what this means for us.
That's why we are investing in our economic capacity to make sure it can withstand any future shocks and maximise the opportunities that will flow to us in the Asian Century. This means serious economic reforms like putting a price on carbon to drive investment in the clean-energy technologies of the future. It means continuing our record of serious tax reform, where we are introducing a broad range of reforms, like the Mineral Resource Rent Tax and a cut to the company tax rate.
It means announcing in the Budget a record skills and training package that converts the prosperity of the mining boom into more and better jobs - for both the mining and non-mining sectors of our economy. And it means increasing our skilled migration program to ensure it is supplementing our labour needs of the future
Mr Speaker, despite the challenges facing the global economy, the Government's reform agenda and our solid foundations will ensure the Australian economy remains the envy of the developed world.